The recently passed tax cut is something of a victory for the American
taxpayer and also President Bush. Rebate checks will soon be in the mail,
marginal income tax rates will reverse their decade-long ascent and begin
to fall for the first time since 1986, the marriage penalty and the confiscatory
death tax are to be eased - and most importantly, resources are to shifted
from the government to the wealth-producing agents of the private sector.

It is a much smaller tax cut than the American people deserve and perhaps
than the economy needs, but it is also significantly larger than anything
the Democrats had previously been willing to accept and is still too large
for the party leadership. Nevertheless, President Bush accomplished this
tax cut with bipartisan support. In the Senate alone, 12 Democrats and
Jim Jeffords joined all but two predictably incorrigible Republicans in
voting for the compromise tax cut. In addition to offering mild relief
to taxpayers and a modest jolt to the economy, this tax cut enhances the
president's political capital as the Senate moves into Democratic hands.

Yet this is not the unqualified victory it could have been. The tax cut
should have been much larger and it should come to pass much more quickly,
to avoid future Democratic nullification prior to its pro-growth aspects
even taking effect. It is appropriate for Republicans and the Bush administration
to derive some satisfaction from this tax cut, but they also must contemplate
the things that went wrong on the road to tax relief.

As both sides of the tax debate never tire of telling us, this is a $1.35
trillion tax cut. This is a reduction from the $1.6 trillion tax cut President
Bush initially sought, which like the third bowel of porridge he insisted
was "just right." Question: How large was the dollar amount
of the Reagan tax cut in 1981? Although it has today saved taxpayers more
than $2.5 trillion, no uniform figure can be assigned to how large a tax
cut it was supposed to be a decade ago. This is precisely because the
Reagan administration wisely did not sell their tax package in terms of
the size of its dollar amount. Instead, the centerpiece of President Reagan's
proposal was the 30 percent across-the-board reduction in marginal rates
originally proposed by Jack Kemp and Sen. Bill Roth.

By fixating on dollar amounts, Bush defined his tax cut in terms of foregone
revenue and as a percentage of the budget surplus. This was his weakest
suit. Democratic critics of lower tax rates argued that the projected
budget surpluses may never materialize and that tax cuts could return
us to budget deficits. However, the exact dollar amount of any tax cut
like Bush's is unknown. That it would cost $1.6 trillion assumed that
taxpayers would not modify their behavior in response to lower tax rates
and that there would be no revenue "re-flow" due to increased
economic activity. It may be the case that the budget surpluses would
not have been as large as $5.6 trillion over the course of ten years.
It is equally likely that the actual "cost" of the Bush tax
cut would have been less than $1.6 trillion.

As Bush's own economic adviser Larry Lindsey has demonstrated, the Reagan
tax cut cost one-third less than static projections anticipated. For every
dollar of revenue lost, the tax cut stimulated $3 in additional economic
growth - economic growth that created new personal wealth and raised living
standards. Not only would such growth alter the amount of revenue actually
lost by cutting taxes, it would improve the chances of the budget surpluses
reaching their projected levels since these projections were themselves
dependent on growth.

Bush should have sold his tax cut by promoting individual aspects of
the plan likely to be popular and made the rate cuts its centerpiece.
By insisting on a specific dollar amount for his tax cut, Bush placed
his proposal in direct competition with a whole host of federal spending
projects and the budget surplus. Worse, he put himself at the mercy of
those who score tax cuts without regard to their behavioral responses
from taxpayers and will portray any such proposals in the most negative
- even if least accurate - light.

Another critical mistake was setting a ceiling on tax relief rather than
simply a floor. President Bush insisted that his tax cut be no smaller
and no larger than $1.6 trillion. This was despite the fact many Republicans,
including House Majority Leader Dick Armey (R-Tex.), and the nation's
leading conservative commentators were wiling to endorse much larger tax
cuts. In fact, many questioned whether even the full Bush tax cut was
adequate to enable the economy to resume its growth potential. By conceding
that the tax cut should be no larger than $1.6 trillion at the same time
he was moving the Democrats in the direction of increasingly large tax
cuts, Bush insured that it would be smaller than $1.6 trillion.

Miller

This is an especially devastating miscalculation in light of the fact
that Bush at one point had all 50 Republicans (then including Jeffords)
and Sen. Zell Miller (D-Ga.) willing to at least contemplate the full
tax cut in exchange for a variety of compromises. (Some of which may have
been acceptable, others unacceptable.) But placing any ceiling on tax
relief obviated any floor he would choose to observe, and shift the dynamic
to reducing the tax cut's overall size. If Bush had been willing to entertain
tax cut proposals in excess of $2 trillion, or better yet not define his
tax cuts in terms of dollar amounts but favor the inclusion of deeper
rate cuts or cuts in other taxes, the final package would have been much
closer to the original proposal. Perhaps if Republicans had been willing
to utilize the support of a number of Democratic senators for capital-gains
tax cuts, it could have even been larger.

Republicans also did a poor job refuting allegations against the Bush
tax cut that were based on methodologically flawed analysis. In the case
of the proportion of the tax cut that would go to the top 1 percent of
earners, this was based on anticipated rather than actual income. Paul
Craig Roberts described an even more egregious example in his syndicated
column. A Democratic House Ways and Means staffer calculated that cutting
the estate tax would increase avoidance of income and capital gains taxes,
persuading the Joint Tax Committee to increase the projected "cost"
of the death tax cut by 61 percent. This padded the dollar amount of the
tax cut, which Bush found so important, by some $250 billion. So much
for only supply-siders maintaining that changes in tax policy affect the
actions of taxpayers.

This is not to belittle the importance of cutting taxes. Unlike his father
and Bill Clinton, who raised tax rates, and following a decade of unlegislated
tax increases via "real-income bracket creep," President Bush's
efforts have resulted in welcome legislation. It will increase incentives
by lowering rates and will put money currently in the possession of the
government back into the private sector to be used more efficiently. But
it could have been far larger and had a far greater impact without requiring
anything more radical than what the Bush White House is realistically
capable of.

Now that they have the Senate, the Democrats have already indicated they
will seek to reverse parts of the tax cut. If Bush and the congressional
Republicans can learn from their mistakes, they can preserve the tax cut
they just won and perhaps make it larger.

W. James Antle III is a former researcher for the Rhema Group, an
Ohio-based political consulting firm. You can e-mail comments to wjantle@enterstageright.com.

Both
taxes and spending must be cut by W. James Antle III (April 16,
2001)
A $1.6 trillion tax cut over ten years, albeit small, is nice, but a
$1.96 trillion budget for the next fiscal year isn't. W. James Antle
III argues that both taxes and spending must be cut